Each year, regulatory groups face growing challenges to help police against market abuse. In 2018, US prosecutors have relied on an unlikely source to help give them an edge against market spoofing, namely Navinder Sarao, a UK day trader found guilty of spoofing stock index futures. He has been instrumental in helping US authorities crack down on this form of abuse.
Sarao was accused of involvement in the 2010 flash crash by spoofing trades with a computer program. In November 2016, he pleaded guilty to wire fraud and spoofing, and now faces upwards of thirty years in jail.
To recap, in the aftermath of the flash crash, US indices tumbled over 9 per cent, with liquidity from the market rapidly disappearing as high-frequency trading shops hit the ‘stop’ button on their algos. The Dow Jones Industrial Average also shed nearly 1000 points in minutes, with the bulk of the move rapidly being retraced back. Sarao’s trading netted him $900,000 profit that day and over than $40 million over four years.
Since then, Sarao has found himself on the other side of things, assisting US prosecutors in building a case against market abuse, per an FT report. This included criminal spoofing charges leveled this week against Jitesh Thakkar, a technology consultant in the US. The assistance provided by Sarao is part of a broad effort on his part to receive a reduced sentence.
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To date, Sarao has not yet been sentenced for his own actions – however, the recent charges this week against Thakkar were part of a massive futures market criminal enforcement action, and Sarao was key to assisting it.
Federal authorities had isolated a period between October 2011 and April 2015 in which Thakkar was allegedly conspiring to spoof the e-mini S&P market. Of note, Thakkar’s company, Edge Financial Technologies of Chicago, is responsible for building algorithms, high-speed trading platforms and kill switches for traders.
Thakkar had indicated he had begun working with an unnamed trader on October 12, 2011 after engaging in an email communication. However, language deployed in the email is nearly identical to an email stemming from the same date between both Thakkar and Sarao, which the CFTC had previously filed in its own case against Sarao.
Additionally, the criminal complaint against Thakkar pointed to a co-conspirator who was a futures trader in the UK and pleaded guilty to one count of wire fraud and one count of spoofing on November 9, 2016. This string of attributes taken as a whole almost certainly points to Sarao.
Consequently, the court filings point to Thakkar and Sarao working together more than a year later. James McDonald, the CFTC enforcement director, noted: “In its effort to root out spoofing from our markets, the CFTC will work vigorously to hold accountable not only the individuals who engage in the spoofing, but also those who produce and sell the tools designed to spoof.”